Rupee gains for second day after hitting 16-month low of 68.11 against US dollar

The rupee has had a rough ride of late but the good news is that it continued to strengthen for a second day today. The rupee opened eight paise higher at 67.72 against the US dollar this morning. It proceeded to gain 13 paise in the morning trade before slipping again and is currently at 67.70.

The rupee on Tuesday crashed by 56 paise to close below the psychologically-important 68 level against the US dollar at the interbank foreign exchange market - the lowest since January 2017. Blame it all on soaring global crude prices, macro concerns like rising inflation, the uncertainty at the Karnataka polls and sustained foreign fund outflows. Foreign investors and funds pulled out over Rs 15,500 crore from the Indian capital market in April, making it the steepest outflow in 16 months.

However, the domestic currency recovered yesterday and closed at 67.80, up 27 paise on suspected RBI intervention. According to The Economic Times, the apex bank might have sold $300-400 million proactively in the first 10 minutes on Wednesday to prevent any further fall in the rupee against the dollar.

Meanwhile, oil prices have hit their highest level since November 2014, with Brent crude creeping ever closer to $80 per barrel as supplies tighten and demand remains strong. According to Reuters, US bank Morgan Stanley said it had raised its Brent price forecast to $90 per barrel by 2020.

That's bad news for India as well as the rupee. Since India is a net crude oil importer, such a price hike will inflate the import bill and disrupt the fiscal position. India's current-account deficit, which already widened to $13.5 billion in Q3 FY18, up 87 per cent over the previous quarter, is reportedly forecast to hit its highest level in six years this fiscal. Moreover, as pointed out by Kotak Securities, a high deficit means the country has to sell rupees and buy dollars to pay its bills. This reduces the value of the rupee.

But things may not get that bad. Asian Development Bank (ADB) in a recent report projected crude oil prices to remain around $65 a barrel in 2018 and $62 a barrel in 2019, which is a welcome relief from the current levels. "Oil prices are determined by demand and supply. We are seeing some fluctuation in oil prices, but unless overall fundamental demand supply changes happen, we don't see any substantial deviation from this baseline forecast," said ADB Chief Economist Yasuyuki Sawada. He added India need not worry much about currency fluctuation at the moment thanks to the forex reserves. The latter rose by $503.6 million to touch a life-time high of $424.864 billion in early April.